Further Variance Analysis

ANSWERS TO LECTURE EXAMPLES

Example

Standard mix to produce 9 litres of output:

5 litres of X at £7 per litre = £35
3 litres of Y at £5 per litre = £15
2 litres of Z at £2 per litre = £ 4
£54

Standard loss =10% of input. Actual output = 92,700 litres

Actual inputs:
53 000 litres of X at £7
28 000 litres of Y at £5.30
19 000 litres of Z at £2.20
100 000
£
= 371 000
= 148 400
= 41 800
561 200
Direct material usage variance

Output should did diff Std Variance

92,700 use use Cost £
X 51500 53000 (1500)A 7 (10500)A
Y 30900 28000 2900 F 5 14500 F
Z 20600 19000 1600 F 2 3200 F
103000 100000 7200 F

Actual output x standard input/standard output ratio

92700 x 10/9 = 103000
= (AQ – AQ in standard mix) × SC

AQ AQ in standard mix Diff SC Variance £

X 53,000 100,000 × 5/10 = 50,000 (3,000)A £7 (21,000)A
Y 28,000 100,000 × 3/10 = 30,000 2,000 F £5 10 000 F
Z 19,000 100,000 × 2/10 = 20,000 1,000 F £2 2,000 F
100,000 100,000 (9,000)A

Mix variance = £9 000 A

Yield variance is the difference between the standard
output for a given level of inputs and the actual
output:

= (Actual yield – Standard yield from actual input)

× SC per unit of output

= (92 700 –90 000 )× £54/9 =£16 200 F

Mix and yield variances are interrelated and should not

be interpreted in isolation.
Total variance = SC (92 700 ×£6) – AC (£561
200) = £5 000 A

Price variances £12 200 A

+ Mix variance £ 9 000 A
+ Yield variance £16 200 F
£ 5 000 A
The standard labour input associated with the production of one unit is:
◦ 4 hours of skilled labour at £15 per hour
◦ 6 hours of unskilled labour at £10 per hour.

The standard labour cost of one unit is £120. The standard total labour
input associated with production of one unit is 10 hours at an average
hourly rate of £12 (£120/10 hrs). Standard labour mix is 40% skilled
and 60% unskilled.
During period 6:
◦ 25 units are produced
◦ 95 hours of skilled labour are used
◦ 175 hours of unskilled labour are used
◦ £3,267.50 wages are paid.

Calculate the labour cost variance and analyse this into labour rate and
labour efficiency component variances. Analyse the labour efficiency
into labour mix and yield components.
Labour cost variance (total)
25 units should cost x £120 3,000.00
Did cost 3,267.50
(267.50) A

Labour rate variance (Act hrs @ std rate v act wages paid)
Skilled 95 x £15 1,425.00
Unskilled 175 x £10 1,750.00
3,175.00
Did cost 3,267.50
(92.50) A
Labour efficiency variance
Skilled: 25 units should take x 4 hrs 100 hrs
Did use 95 hrs
5 hrs F
x std rate £15
£75 F

Unskilled: 25 units should take x 6 hrs 150 hrs

Did use 175 hrs
(25) hrs A
x std rate £10
(£250)A
75F + (250) A = (175) A
 Team composition (labour mix)
= (std labour mix for act hrs worked – act hrs worked)
x std hourly rate

Act Std mix of Act hrs Diff Std rate Mix

hrs (hrs) £ variance
£
Skilled 95 40% x 270 108 13 F 15 195 F
Unskilled 175 60% x 270 162 (13) A 10 (130) A
270 270 65 F
Team productivity (labour yield)
270 hrs worked should yield /10 27 units
Did yield 25 units
(2 units) A
x std labour cost/unit of output £120
(240) A

(175)A = 65F + (240) A